English Appendix
Contract certainty
The United Kingdom in search of certainty
FRANÇOIS SETTEMBRINO
FERMA – Federation of European
Risk Management Associations
English risk managers are a dogged breed once they get an idea between their teeth, and they have teased out a set of considerations, the most important of which could be summed up as follows:
- Insurance policies must be issued before inception. This seems to go without saying and is generally the case with continental insurers, but our friends aim to fulfil their wish in 85% of cases by the end of 2006. For the remaining 15% no one dares to make any predictions, for this will become more and more difficult.The problem is recurrent for contracts set up on the English model, for it is generally necessary to establish a new contract upon renewal. A degree of certainty may be expected from this procedure but it will by no means be automatic; certain accidental or even deliberate modifications may be slipped into the renewed contract for such diverse reasons as modifications in the risk or the insurer's perception.
- One of the sine qua nons of this certainty is that the contract terms and conditions have been correctly construed by insured and insurer.This is pretty much an across the board wish for everyone who takes out an insurance policy, whether businessmen or individuals.This means that the texts have to have been construed and accepted with knowledge aforethought by the parties. Quite apart from the fact that there is a built-in informational lopsidedness between insured and insurer, because of the latter¡¯s professional expertise, no one can really claim that everything has been properly understood.Terms as ostensibly simple as ¡ìevent¡í or ¡ìseries¡í have spawned entire manuals trying to define all their facets; but these difficulties pale into insignificance in comparison to the differences of interpretation between those who have commercially negotiated the contract and loss adjusters. A simple method of greatly cutting down problems of this sort would be to invite loss adjusters to collaborate in the wording of the contracts . . . but there is fat chance of this being accepted by the insurers themselves, who would forfeit the possibility of rejecting a large number of claims. It would also be necessary to keep a written record of all that has been agreed, a daunting task in itself that would in all likelihood prove useless in any case, for the more you get bogged down in some details there more likely you are to overlook others.
- There is another point that is rarely addressed, namely
reinsurance. In the event of a major claim, reinsurers
use specialised office services who leave no stone
unturned.The exercise may be perilous for both
insured and insurer. If this claim strays even slightly
beyond the accepted limits of the reinsurance treaty, it
could be rejected or run into difficulties. As a general
rule, the terms of the insurer’s treaties are more
generous than the insurance terms they agree with
their clients, but there are some exceptions to this
rule. If the reinsurer turns the claim down flat and if
the insurance contract is errorless, the insurer has to
defray the loss out of its own pocket, which could be
awkward if the claim is big. It could even drive the
insurance company to the wall or rock the boat for
the other insureds.Any dispute can be submitted to
the authorities or the courts, but this could be
precarious and time consuming. Fortunately the times
are long gone where the reinsurer would refuse to
intervene whenever the direct insurer was in
difficulties or in default, on the grounds that its treaty
came into play only after settlement by the direct
insurer. Precious little mercy was therefore likely from
the reinsurer, since in many cases the part of the loss it
covers is so large that the direct insurer passes on
practically the whole risk.
The reinsurer’s powers are vast but very few insured parties concern themselves about the reinsurance of their direct insurer when taking out the policy or at any point thereafter.As there are no rules or customs governing the matter, this significant aspect of insurance coverage will continue to be shrouded in obscurity. - From all the above it follows that a pitched administrative battle is joined.The client and its broker need first to come to some sort of agreement on what they deem to be fundamental points, on the terms and conditions to be demanded or negotiated, to be expressed clearly and, as far as possible, unequivocally. If particular points have been negotiated they should be easily track-downable in the contract addendums.This also means that the information exchanged should be a faithful reflection of reality without misleading anyone: activities, statistics, commercial agreements or other agreements, etc. And all this must be set down in a flawless timetable to ensure that the policy is agreed in time and with the least possible argument. Easier said than done!
- Our English friends have discovered a by product of the whole phenomenon; it is no longer only a question of having a neatly drafted and crafted contract issued within the desired time and fulfilling the parties’ wishes; the texts must also be clear and precise. Even if everything has been done to a turn, it will still be necessary for all stakeholders in the contract to understand the document perfectly. Certain clauses concern commercial co-contractors or suppliers or also clients with, for example, peculiarities of such complexity as waivers of appeal, reciprocal preferences or references to patents and permits. In international affairs there are also difficulties born of very different legal or juridical frameworks, without forgetting the weight of languages and customs. But perhaps the most galling aspect is the irksome tendency of experts and other loss adjusters, often egged on by the insurers themselves, to meddle in the post-claim interpretation of the contract. If the texts are clear for everyone involved, they are likely to be steerable towards a successful end. In effect, it little avails to be proved right after the event, for the appraisal of a claim has to be carried out as quickly as possible and the time taken is damaging first and foremost to the insured. Much of the problem could be solved simply by asking said experts not to meddle any more in something that concerns only the insured and insurer (and reinsurer?).Their remit is to delve as deeply as possible into the facts of the case and the corresponding damages. All too often these experts act as protectors of the insurer, with a certain bias against the insured in their examination of the loss; hence the avalanche of secondary expert opinions and potential disputes.The courts’ comprehension cannot always be counted on if the affair is taken to law, for the matter is anything but simple and can all too easily be drawn out indefinitely to suit vested interests.
- All the above is fine in terms of drawing up a completely
new contract, but how should pre-existing contracts
be brought into line with this new approach? Current
contracts or contracts to be renewed should also come
in for special attention, on the basis of a strict
timetable:
First of all, deal with contracts formalised after 1 January 2005 and those running their term after this date and then the older ones. - Only the English could get so bogged down in detail, but to do them justice it has to be admitted that periodical contract renewals are never simple; it is sometimes more complicated than starting from scratch, since all amendments and addendums have to be completely understood.
- Nor is that all: how far will Basel II change the insurers’ actuarial reasoning and structure and their behaviour? Here we will soon have to tackle the tricky problem of their solvency under the new procedures. Here again our English friends are stealing a march, preparing a little candidly the technical questions insurers will or have to answer or should answer. As if that were not enough, they are going to enforce a classification of their insurers in terms of their way of dealing with claims and the quality and speed of their action. It would seem that insurers sometimes drag their feet to delay payment and nurse their cash flow. This would amount to a new type of rating.Will this be even more difficult than reliably looking into the performance of pension funds, for example? Each major brokering house has already set up its own rating system, each differing from the other of course, so it will take no little time for them to come to agreement with all the insureds.
All the above will come as only a mild shock to us continentals.The abovementioned behaviour is already well documented and the authorities, moreover, have already taken measures to ensure that claims are dealt with in a reasonable timeframe. International insureds have already been educated in English ways, for the sheer size of their policies makes a recourse to the international market both necessary and obligatory.Anything that might cut down the time spent dealing with claims would only be welcome. Nonetheless a certain scepticism reigns in terms of a «certainty» of contract content and universal values for the terms and clauses used. An additional complication stems quite naturally from the differences in languages and customs in a constantly changing legal environment. Such a set of circumstances will always be conducive to potential litigation, all the more so as the differences of interpretation, exclusions, preclusions cannot always be tidied up neatly beforehand.
Some years ago a panel representative of the population, comprising upper and lower class members, was asked about their comprehension of the «insurance» phenomenon.After much debate they answered by way of a pithy question: how to be reassured as an insured. Today’s worthy folk, if asked the same question, would no doubt come up with the same answer because everyone, deep down, dreads the detail, the term or condition they have misunderstood, and which determines what is covered and what is not covered, as non-coverage, exclusion or preclusion. Any improvement our English friends may achieve will always be welcome but we will never tie up all the loose ends. Is this still commerce or have we strayed into philosophy?